In The Headlines
Spurred by the Affordable Care Act, Large Health Insurers Pursue Mergers
Anthem and Cigna are the latest big American health insurers to propose a blockbuster merger. They and their peers need to satisfy many regulators, though, before the deals are approved. Aetna has agreed to buy Humana for $37 billion, Anthem will pay $48 billion for Cigna, and the UnitedHealth Group might top either offer. The companies seek the leverage that increased size would bring to price negotiations with hospitals and drug makers. Mergers could also lead to cost savings and higher profit, a growing concern for insurers since the Affordable Care Act required them to spend at least 80% of premiums on medical care. And fewer rivals could mean more room to raise premiums.
State insurance commissioners have primary responsibility, so each deal must pass muster with those in jurisdictions where the parties do business. The commissioners consider local competition, the financial condition of the companies, and similar factors in determining whether a merger is in the public interest. They also trump federal officials on antitrust matters involving “the business of insurance,” as defined by the McCarran-Ferguson Act. Insurers are allowed to collude, for example, by pooling data to set policy rates. Mergers are not considered the business of insurance, however, and the Justice Department will determine whether any deals violate antitrust laws. In 2012, for example, federal regulators required Anthem to divest itself of certain operations before buying its rival Amerigroup.
Regulators worry most about less competition and higher prices. Insurance markets are highly concentrated, and big mergers will make them even more so. If Aetna acquires Humana, for example, the combined company will serve almost 90% of Kansas patients covered by Medicare Advantage, the privately run side of the federal insurance program for older adults. It will also control two-thirds of the market for policies covering individuals in Georgia. A union of Anthem and Cigna would create the nation’s largest health insurance company.
One contention is that mergers would make companies big enough to rival Blue Cross Blue Shield, a nationwide federation of 36 insurers that separately serve a region and do not compete. Blue Cross Blue Shield companies are together the largest insurers of individuals and businesses in most states. They control more than 90% of the Alabama market, for example, and cover about 106 million Americans. Aetna and Humana combined, by comparison, would serve only 37 million customers. Yet combining just two of the top five insurers would eliminate one of the two companies that operate nationwide. And those companies already dominate coverage under Medicare Advantage. What is more, the argument that a big merger would create competition for an even heftier rival has already failed in other industries. In 2011, for example, Sprint, the third-largest cellphone service provider at the time, defended its plan to buy T-Mobile US, the fourth-largest, as necessary to keep its rivals, Verizon and AT&T, in check. The Federal Communications Commission and the Justice Department rejected the contention, making clear that shrinking the market to fewer than two nationwide carriers would harm consumers.
Insurers could also argue that a combination would create savings and improvements in technology that would be to the benefit of consumers. Besides, they may point out that state insurance commissioners would have to approve any rise in insurance premiums. Yet the commissioners have often been reluctant to deny insurers rate increases, and insurance company mergers typically lead to higher premiums, according to a study by Leemore Dafny, former Director of Healthcare Antitrust at the Federal Trade Commission. The Affordable Care Act could be the answer. President Obama’s health care overhaul creates online exchanges for buying coverage, allowing insurers to expand into new markets without hiring expensive agents. The companies will still need the approval of state commissioners, but the lower barriers to entry should stir more competition and, at least in the future, appease regulatory fears. It is unclear whether that would be enough to counterbalance concerns over the large market shares top five insurers.
If any mergers among the top five insurers are to gain approval, the companies will almost certainly have to unload overlapping businesses. Aetna and Humana, for example, together control major slices of the commercial insurance market in Florida, and of the Medicare market in Kansas. Trustbusters would probably require the two companies to sell off pieces of those businesses.
Anthem says it does not expect its purchase of Cigna to close until the second half of 2016. Even that is optimistic, if recent mergers in heavily regulated industries like telecommunications and banking are any indication. The odds of approval might improve after the presidential election late next year if a Republican wins the White House. President Obama’s administration has been tough on mergers, but a Republican administration might ease up. With only one, or maybe two, big insurance deals likely to get through, however, it is too risky to wait and allow a competitor to jump ahead in line.
Citations
1. http://nyti.ms/1JG6vfd – NY Times DealBook
Millennials and Boomers Compete for Urban Rental Housing
The number of renters who are 65 or older will reach 12.2 million by 2030, more than double the level in 2010, according to research by the Urban Institute in Washington. While the millennial generation born after 1980 has driven demand for apartments in recent years, baby boomers, those born from 1946 to 1964, will be the next wave, pushing up rents and spurring construction of more multifamily housing. Real estate developers such as Bozzuto Group, Abelson’s Management Company, and Alliance Residential Company are building projects where multiple generations can coexist. Should the supply of rental properties fail to keep up, however, younger people will be competing for housing with the burgeoning population of older Americans.
“It’s a combination of their sheer size and that they’re entering the age range where they increasingly downsize,” Jordan Rappaport, a senior economist at the Federal Reserve Bank of Kansas City, who has also studied the subject, said in a telephone interview. As a result, “…it will put upward pressure on rents for all types…” of multifamily homes, he said. Rappaport’s research found that adults in their 50s and 60s accounted for almost all of the net increase in multifamily occupancy from 2000 to 2013. Once members of the baby boom generation start entering their 70s next year and downsize, “…multifamily home construction is likely to continue to grow at a healthy rate through the end of the decade,” he wrote in a report published last month. Already, rental vacancy rates are hovering near 21-year lows. That is pushing the national median rental price for all types of homes to $1,367 a month as of May, up 14% from four years ago, according to data from Seattle-based Zillow, a real-estate website. In June, work began on the most buildings with five or more units since 1987, Commerce Department figures show. They represented about 41% of total housing starts, up from 16% when the economic expansion began in June 2009.
Lennar Corp., a Miami-based builder primarily focused on single-family home construction, formed a $1.1 billion joint venture that will develop multifamily communities in 25 U.S. metropolitan markets. Alliance Residential is designing buildings with smaller, more affordable units on ground floors to attract young adults, while creating more spacious apartments on upper levels, said Ian Swiergol, Managing Director of the developer’s division covering New Mexico, Arizona, and Utah. The bigger units feature wine refrigerators and touch-button window screens that appeal to baby boomers with more wealth.
At Bozzuto, which manages some 51,000 units in cities including Washington, D.C., Chicago, and Atlanta, about 10% of renters in 2014 were at least 60 years old, up from 8% in 2012. The Greenbelt, Maryland-based company expects their share to continue to grow, according to President Toby Bozzuto. “Something’s happening,” Bozzuto said in an interview, adding that the company is looking to add rental properties catering to residents 55 and older. “A good business person tries to put themselves in front of opportunity.”
Rents have already been picking up, rising 3.5% in the 12 months through June 2015, matching the biggest increase since 2008, Labor Department data show. By comparison, consumer prices excluding food and fuel advanced 1.8% in the same period. Rents are putting a floor under broader inflation, which Federal Reserve policy makers have said they need before deciding to raise their benchmark interest rate for the first time since 2006.
One downside is that seniors on fixed incomes who have to rent rather than choose to, will be hurt if supply does not keep pace with the projected increase in demand, said Laurie Goodman, Director of the Housing Finance Policy Center at the Urban Institute. Generation X adults, born from 1965 to 1980, may also introduce another wrinkle, as those who lost their homes in the housing crisis remain in rentals. “It’s not unreasonable to think that some seniors are going to get hurt disproportionately,” she said. “There’s going to be just a huge surge in the demand for rental housing, and there’s not enough.”
Amy Schectman sees this first-hand as the Chief Executive Officer of Jewish Community Housing for the Elderly. The nonprofit provides subsidized rental units for older adults in Brighton, Massachusetts, and the waitlist starts at two years for studio apartments, she said. For a two-bedroom,“…you might be looking at seven to eight years.” Schectman said. “We’re already seeing huge demand. And it’s only going to grow.”
Citations
1. http://bloom.bg/1g178ZC – BusinessWeek
The Good News Is . . .
• The Conference Board reported that its Leading Economic Index rose 0.6% to 123.6 in June following a revised reading of an 0.8% increase in May, and a 0.6% increase in April. Analysts had forecast that the leading indicators index inched up 0.2% in June. “The upward trend in the U.S. Leading Economic Index seems to be gaining more momentum with another large increase in June pointing to continued strength in the economic outlook for the remainder of the year,” said Ataman Ozyildirim, economist at the Conference Board, in a press release.
• Amazon.com, a leading online retailer, reported earnings of $0.19 per share. The firm’s earnings topped the consensus estimate of analysts by $0.33. The company reported revenues of $23.2 billion, a 19.9% increase. Management attributed the company’s results to strong growth in its web services business and improved operating margins.
• Health insurer Anthem said on Friday that it had agreed to buy Cigna for $48.3 billion, finally striking a deal after a nearly year-long pursuit. By buying its rival, Anthem intends to create a new giant in the sector, gaining greater scale and considerably cutting costs. The recent merger activity among insurers has been spurred on by the Supreme Court upholding the portion of the Affordable Care Act (ACA) that subsidizes consumers who buy policies through the government’s online marketplace. Under the terms of the deal, Anthem said it would pay $103.40 a share in cash and 0.5152 of a share in Anthem stock, or $188 a share.
Citations
1. http://bit.ly/1fLVlWY – The Conference Board
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1ekfHwU – Amazon.com
4. http://nyti.ms/1JG6E21 – NY Times Dealbook
Planning Tips
Guidelines for Understanding the FICO Credit Scoring Changes
Your credit report and credit score remain important whenever you want to borrow money. Whether you cosign for a child’s or grandchild’s loan, tap your home equity to buy a vacation home, or simply finance the purchase of a new car, you will need to have good credit. FICO is currently the most widely used credit scoring model. Below are some changes being implemented to the FICO model that may affect your credit score and your potential to borrow money.
Credit report errors get easier to fix – The credit bureaus are overhauling the way they handle credit-reporting disputes. Instead of using automated processes to handle all consumer disputes, they will use specially-trained employees to investigate complaints about mistakes in credit reports in instances where consumers provide written documentation about errors. Consumers will also receive additional information from the bureaus after the dispute has been investigated, including a list of options if they are not happy with the outcome.
More time to resolve medical debt – Medical debt—a big source of problems for many older Americans—will not immediately hit your credit reports or hurt your credit score. Currently, if you are at least 30 days late in paying a bill, it can be reported to the credit bureaus and go on your reports as a delinquency. And this info can stay on your reports for seven years. But under the new changes gradually going into effect, past-due medical debts will not be reported to the credit bureaus until after a 180-day waiting period. With this restriction in place, consumers and medical providers will have more time to work out billing disputes or to ensure that insurance payments have been properly applied.
Nontraditional payments, like rent, will become more important – For decades, only traditional loans, such as mortgages, car notes, or credit card bills were reported in your credit files. Now, nontraditional data, such as routine utility bills and sometimes even monthly cellphone payments, are being reported to the credit bureaus. But the biggest category of nontraditional data being reported is rent payments—a trend that some observers say will become the norm in the future. There is another reason behind the push to include nontraditional data like rent payments in credit reports: Studies show that this information generally helps consumers demonstrate their credit-worthiness. Consumers with two or fewer credit accounts have “thin files.” Many lenders have higher restrictions on thin-file consumers. And that can hurt older borrowers because people tend to borrow less often as they get older, says Burns.
Moving frequently could hurt your score – People who move around a lot may end up with a less-than-stellar credit score under the new system. Address history in the new score is used as a measure of consumer stability. If you change addresses frequently, regardless of the reason, it could negatively impact your credit score.
Paid-off and settled collections with a zero balance will be ignored – Under the previous FICO model, if you let an account go into collection, your credit score would take a hit for as long as that collection is on your credit report (seven years). Not so with the new version. Now, as long as the collection has a zero balance, it will be ignored in the calculation of your credit score.
Citations
1. http://onforb.es/1Acw9TM – Forbes
2. http://bit.ly/1SYsk0h – AARP
3. http://bit.ly/1AB6Crs – US News & World Report
4. http://nerd.me/1CXTbpB – NerdWallet.com
5. http://huff.to/1u9HvtN – Huffington Post
